What is Welfare Economics?

Welfare economics is a discipline of study that focuses on the equitable allocation of resources as a means of achieving the highest degree of good or welfare for everyone concerned. The concept of this type of economic activity holds that by managing the distribution of those resources to best effect, it is possible to improve the overall status of the social welfare of a community, nation, or group of nations. This approach to social equity calls for using consumer surplus to ensure that each individual enjoys a decent standard of living that is similar to the standards enjoyed by others in the community.

One of the tools used to analyze welfare economics is the Lorenz curve. The curve is normally presented in the form of a graph, and takes into account factors like the percent of income that is owned by the poorer class of a community, in comparison to the percent of income owned by the richer classes. When graphed, the data demonstrates the amount of disparity found in the distribution of wealth within the community. This simple and straightforward calculation makes it possible to quickly determine the degree of disparity is present, paving the way for dialogue on how to redistribute that wealth and decrease the current level of disparity.

The goal of this analysis is to determine what constitutes pareto efficiency within the economy. In other words, welfare economics is aimed at achieving a balance where the circumstances of one individual or group is made worse by the improvement in circumstances for anyone else within the community. In order to achieve pareto efficiency, the methods employed would have to ensure that the standard of living either remained the same or improved for the entire community. No one in the community experiences a reduction in the standard of living as a result of the redistribution of income or wealth.

Like most economic strategies, welfare economics has its proponents and its detractors. Those who support the general concept point to this more efficient use of available resources as a means of eliminating poverty and ensuring that everyone in society has the chance to participate in the economic development of the community. This support would take the form of employment opportunities as well as functioning as active consumers for the goods and services produced by industries within the community. Detractors see welfare economics as an extreme expression of social welfare, in which the rich are made responsible for the upkeep of the poor, effectively undermining the concepts of capitalism and the entrepreneurial spirit. The idea is that without the incentive to create new business ventures that generate a great deal of income for the owners, the economy will go stagnant as people settle for the status quo, and make no effort to enhance current goods and services, or to invent new goods and services.